Boom, bust, or crystal ball gazing?

This blog post is written by Ariana Stuart, a Senior Associate in Kensington Swan’s Construction and Major Projects team.

Yet another report has been released considering the current construction ‘boom’. MBIE has released its National Construction Pipeline Report 2017  forecasting building and construction activity. Of note, is that MBIE has forecast the construction boom to last longer than expected (and predicted this year by others), remaining above $30billion for at least the next five years. In particular, construction and building activity is expected to grow another 23% by 2020, peaking at $42 billion (which is $5billion higher and three years further out than previously predicted by MBIE).

Other key findings include:

  • Residential:
    • Residential building grew 11% in 2016, and while it was forecast to peak in 2017 at $21billion, it is now expected to peak at $25billion in 2020 with activity tapering off in 2022.
    • Dwelling consents are expected to exceed 31,000 nationally this year, which is a level not seen since 2004, and should stay high for the next five years. MBIE expects these to reach a maximum of 34,500 in 2019 and 2020.
  • Construction:
    • $34billion of construction activity was carried out across New Zealand in 2016, being an 8% increase.
    • Non-residential building activity in 2016 grew 12%, and is expected to grow another 29%, hitting $9.6 billion in 2019, which is longer and higher than MBIE previously forecast.
    • In Auckland this reached $2.3billion in 2016, which was an increase of 14%, with work forecast to increase a further 69% reaching $3.9billion in 2019.
    • In Wellington, activity grew 2% to $600million, and is expected to remain at this level until 2019. This is due to demolitions, ongoing earthquake strengthening, retail, business, cultural and tourist facilities, hotels, convention centres, university expansions, civic buildings and mixed use developments.
    • In Canterbury, recovery of schools, sporting facilities and civic buildings is continuing strongly with the value of work rising 23% to $2.4billion in 2016. It is forecast to remain above $2.2billion a year, only slowing after 2020.
  • Infrastructure:
    • Infrastructure spend (on roads, tunnels, mining, parks and power stations) dropped in value slightly in 2016 to $7.2billion.
    • It is forecast to leap 25% in value to $9.5billion by 2022.
    • There are over 2,400 known infrastructure projects planned, including the Kaikoura earthquake repairs and the Auckland City Rail Link. A large proportion of these are planned for Auckland and Christchurch.
    • 10 projects worth more than $100million each are due to start in 2017, with significantly more due to start in 2018.
  • Around the regions:
    • Auckland was not the strongest region for construction growth in 2016. Waikato/Bay of Plenty took out that title with construction growth of 13% and residential building activity increasing by 19%. By comparison, Auckland increased 12% in overall construction work, and 18% in residential. Looking ahead, both are expected to enjoy sustained growth to 2020, with Auckland’s boom predicted to last several years post its peak.
    • In Wellington total work rose in value to 6.9% to $2.4billion in 2016, with the majority of growth coming from a 15% increase in residential building. Overall growth is expected to grow 16%, levelling out by 2020.
    • Canterbury’s construction is flat, growing just 0.6% as the residential rebuild has tapered off. Off-setting this is the high level of non-residential work, with this workload expected to remain around current levels until 2019.
    • The remainder of the country enjoyed 8.8% growth in construction, and 18% in residential building activity. It is expected to increase by 23%, peaking in 2019.
    • House sizes have plateaued to around 230m2, and even shrank in some regions such as Canterbury (to 200m2) and in Wellington (to 185m2).

This has led to industry spectators, such as the New Zealand Institute of Building, commenting that the construction industry is heading away from its cyclical nature of boom and bust towards ‘one that is sustainable and robust’. But is this truly the case, or is it a (dangerous) form of crystal ball (or perhaps navel) gazing? Unless there is some form of financial crisis cutting off the financial arm of projects, the planned forward pipeline for work for 2017 and 2018 (especially in the infrastructure sector) will sustain the sector and allow the boom to continue. Care, however, must be taken in assessing the future of the sector post 2022. Equally important is for participants in the industry to carefully assess challenges it is likely to face over a number of years, particularly around sourcing additional workers and resources to meet demand, as this will lead to a sustained period of pressure within the industry. It is crucial to get the right team in place to be able to deliver these projects successfully.

 

 

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